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eGEP Economic Model: Final Report on the Benefits, Costs and Financing of eGovernment

Corsi, Marcella and D'Ippoliti, Carlo and Gumina, Andrea and Battisti, Michele (2006): eGEP Economic Model: Final Report on the Benefits, Costs and Financing of eGovernment.


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The Economic Study aims at assessing the impact of ICT within the Public Sector (PS) to Public Sector itself and to society. In particular, it provides the theoretical underpinning of the tangible elements presented in the Measurement Framework. The basic tenet of our model is that eGovernment programs result into an improvement of labour productivity in PS and, as a consequence, contribute to a number of intermediate outcomes (better services, cost savings, etc), and to the growth of GDP. Indeed, the contribution of PS to GDP can be adequately estimated as equal to the labour productivity of the public sector multiplied by the total number of public sector employees. As eGovernment represents the focus of our investigation, we make a ceteris paribus assumption and consider productivity increases linked only to the introduction of wider forms of eGovernment. Then we estimate PS productivity as a ratio between public sector output and the number of public sector employees. The model considers 5 main channels through which eGovernment projects increase PS productivity: the Market Enlargement or Smith’s Effect, the Substitution or Ricardo’s Effect, the Back-Office Reorganization Effect, the Investments-Led or Schumpeter’s Effect, and Other Take-Up Driven Effects. Given the large share of PS in European countries’ GDP, efficiency in the PAs is an objective per se and a major driver of international competitiveness and economic welfare: the growth of PS productivity is the first channel through which eGovernment enhances GDP growth. Then, two other effects depart from the growth of PS’s productivity: on the one hand, publicly provided goods and services contribute to welfare and are part of a country’s Gross Domestic Product, hence their growth should be accounted in national accounts (the second channel: growth of PS total output). Also, a more efficient public administration contributes directly to the efficiency of the economy as a whole and to the productivity of the Private Sector in particular, by stimulating innovation and the growth of the most competitive and innovative industries (the first, “indirect”, part of the third channel). Finally, eGovernment contributes to GDP growth due to its being part of Aggregate Demand, and its potential impact could further extend to multiplier and accelerator phenomena. Although the model’s foundations lie in a microeconomic analysis of single eGovernment projects and PAs, due to data limitations, following a macro approach, we have instead fit our model by aggregate data, so to produce tentative predictions for productivity and GDP behaviour in the next years, while providing a first validation of the proposed economic model. From this point of view, we can affirm that our results are encouraging, though it should be remarked that estimates are only partial, in many relevant theoretical effects could not be taken into account, and they are based on a rather short period of observation, therefore retaining a smaller statistical significance. Our estimates imply rather strong effects of eGovernment expenditure on PS productivity and GDP growth, even if we only consider the direct effect, i.e. we ignore the potential effect of the increased PS efficiency on the productivity of the private sector, and without even considering multiplier and/or accelerator effects. Our estimations imply that the projections on eGovernment expenditure provided by eGEP would lead by 2010 to a cumulative GDP growth at the EU-level of 1.5%. Furthermore, in a second scenario we also developed a simulation exercise to take into account the aggregate impact of both cost savings related to eProcurement and eGovernment expenditure on GDP growth for the period 2005-2010: if we assume that cost savings related to eProcurement would transfer in additional investments by PAs during the period 2005-2007, the overall GDP growth attributable to eGovernment in the period 2005-2010 can be estimated at 2%. Finally, from both the theoretical implications of the Economic Model and the empirical analysis employed in its validation procedure, we established that, in order to exploit eGovernment potential at its maximum level, it is necessary to work in three directions: increasing both the efficiency and the effectiveness of eGovernment inside Public Administrations and with reference to their main stakeholders (policy recommendations 1 to 4); promoting the diffusion of specific tools for performance measurement, together with a favourable cultural background (policy no. 5); setting-up a number of complementary policies, in order to foster the “take-up” effect, and finally promote productivity and growth. We identified five policy objectives connected to these three strategies: to share eGovernment goals, to address eGovernment towards shared objectives, to favour a performance-friendly environment within the Public Sector, to promote accessible and useful eGovernment services, to great a friendly financial framework for eGovernment, to make the performance measurement mandatory.

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